Unmerited Designs on a Tax Deduction

"You must understand everything depreciates," even a Chanel dress, says Inga Guen, owner of Inga's Once Is Not Enough. (By Bill O'leary -- The Washington Post)

The devil may wear Prada, but the tax collector doesn't seem to care.

Mere mortals don't get a pass, either. The U.S. Tax Court in Washington recently ruled against a New York investment banker who claimed nearly $49,000 in deductions for charitable property contributions -- consisting almost entirely of expensive designer clothing. In a written opinion, Special Trial Judge Lewis R. Carluzzo said her only sin was to be "overly optimistic" about the worth of the clothes, which commanded high prices when sold new.

"Deductions are a matter of legislative grace, and taxpayers who claim deductions must establish entitlement to them," he wrote.

Such are the pitfalls awaiting fashionistas (and their tax preparers) as April 15 creeps closer. Many are constantly reinventing themselves with a new Hermes Birkin bag or pair of red-soled Christian Louboutins. They bring out a different Versace gown to each charity ball. Their favorite date for cocktail parties is Marc Jacobs. And when they're done, the frocks are destined for the donation bin or consignment shop.

But come tax time, these women are forced to take stock of how much such worldly possessions are worth. They are often disappointed.

"When you work with consigners, that is the biggest issue," said Liberty Jones, who runs Alex Boutique in the District. " 'Well, I wore this to the Corcoran Gala.' Well, it doesn't matter. . . . They add a little bit of emotion to it and they think it's more valuable than it is."

According to the court decision, the investment banker making the claim, Christiana Stamoulis of Goldman Sachs, describes herself as an "impulsive buyer" who frequently wore items only once or twice before donating them to Housing Works Thrift Shops in New York, a nonprofit that serves people with AIDS. In 2002, when she claimed her deductions, she charged $53,916 in clothing and $9,253 in shoes to her credit cards. Her adjusted gross income was just under $115,000. She claimed $48,954 in non-cash deductions for property.

Stamoulis also claimed $5,917 in cash contributions and an $893 carryover from the previous year, bringing her total charitable tax deductions to $55,764 in 2002.

The donations went to the Metropolitan Opera, the Lazaretto Orthodox Church of Ithaki and the Hellenic Redcross. But mostly, they went to Housing Works. Ronny Buni, Stamoulis's attorney, said Stamoulis donated more than 100 items to the thrift store that year, which the court did not dispute.

"The only question was what was the value," Buni said in a telephone interview this week. "I don't think the court was very familiar with couture clothing. I think the court found it very hard to believe that they could be worth that much after they had been used."

Buni would not give examples of the items Stamoulis donated but described them as "designer." Stamoulis did not return a reporter's phone call to her home.

In his opinion, Carluzzo acknowledged that determining the resale value of couture clothing was "at best, an inexact science." At Alex Boutique, Jones said a top consignor can donate more than 200 items a year, with a total resale value of about $85,000 -- less than two-thirds of the original cost of the clothes. But Inga Guen, owner of the high-end District consignment shop Inga's Once Is Not Enough, said items typically resell for about 20 percent of the original price. The shop keeps 10 percent, and the remainder goes to the consignor. Items that do not sell may be donated to charities, which then qualifies the original owner for a tax deduction.

"You must understand everything depreciates," Guen said. "Housing, cars and mostly clothing."

Take the case of the beaded pink Chanel gown currently in stock. The original price was about $7,000, she said. It is selling for $1,200.

Sima Osdoby, interim executive director of the nonprofit Suited for Change, said people on her staff often have no idea of the value of the clothing they receive. The group gives professional attire and fashion advice to women in job training. It routinely receives designer names among the J. Crew suits, Osdoby said. But it is the donator's responsibility to determine the fair market value of the clothing for tax deductions.

Stamoulis estimated the cost of her donations in part by tracking auctions on eBay, Buni said. But she never printed evidence of the auctions or followed them to the end. Nor did she check on the price Housing Works charged for her clothes or similar items.

In the opinion released last week, the judge found that Stamoulis's charitable property contributions were worth only $8,949. He ordered her to pay $14,649 in back income taxes and $2,930 for an accuracy-related penalty. Paul L. Caron, a law professor at the University of Cincinnati who wrote about the case on his TaxProf Blog, said he thought the judge was lenient.

"I think he was sort of taken with her, for whatever reason," Caron said. "Typically in these kinds of cases, the taxpayer doesn't get any of these kinds of deductions. The burden of proof is on the taxpayer."